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Why American Families and Businesses Need Financial Reform

NEC Director Lawrence H. Summers runs down the case for financial regulatory reform and publishes materials from a White House meeting on how it would work.

This week, the House Financial Services Committee began its formal deliberations regarding the President's financial reform plan. This is a crucial piece of President Obama's agenda for change and something you will be hearing much more about in coming weeks. Yesterday, we held a meeting at the White House with stakeholder groups to discuss the importance of passing financial reform. We hope you'll take a moment to look through the materials from that meeting below, and we will post the video of the meeting later once it is ready.

Over the past two years, the American people have experienced the worst financial and economic crisis since the Great Depression. From the time the recession began in December 2007, 7.6 million Americans have lost their jobs. During the last few months of 2008 alone, over $5 trillion of household wealth was destroyed. The aggressive actions by the Obama Administration have since pulled us back from the abyss, but the prospects for continued free fall were very real.

Despite the extraordinary depth of this most recent crisis, the pattern it followed – a pattern in which instability emanating from the financial sector ultimately resulted in hundreds of thousands of middle class families who had nothing to do with the financial sector losing their jobs or much of the their savings – is disturbingly familiar:

The Latin American debt crisis of the early 1980s

The stock market crash of 1987

The savings and loan debacle of the late 1980s

The Mexican financial crisis of 1994

The Asian financial crisis of 1997

The bursting of the dot-com bubble

The collapse of the hedge fund LTCM in 2000

The fraud and bankruptcy at Enron

And now the financial crisis that began in 2007

All too often, a financial system that is intended to manage, distribute, and control risk has, in fact, acted as a source of risk. Risk that has resulted in severe consequences for millions of taxpayers, consumers, and investors through little fault of their own.

To protect American consumers from abuse and to set clear rules of the road for Wall Street that will help prevent another financial collapse, President Obama has made financial reform a critical priority of his Administration. His proposals include:

Raising capital requirements

Eliminating a system where financial institutions can choose who regulates them

Imposing rigorous standards and supervision to protect the economy and investors, and

Establishing resolution authority to ensure that no financial institution is too big to fail

But among the President’s proposals, the greatest opposition from Wall Street has been reserved for the proposal to create, for the first time in American history, a unified, independent agency with just one mission: To protect the American consumer from fraud and abuse and ensure that people get the clear information they need about loans and other financial products.

As the President made clear at the White House last Friday, the Consumer Financial Protection Agency "will be charged with setting clear rules of the road for consumers and banks, and it will be able to enforce those rules across the board." It will take on the old ways of treating consumers: predatory lending, inappropriately high credit card rates, and exploitative overdraft fees.

The time has come for a fundamental change in the financial sector of our economy – both in how financial institutions conduct their business and, especially, in how they are regulated.

Financial reform will benefit our economy and result in a safer, more stable financial system. Now is an appropriate moment for financial institutions – every one of which has benefited directly or indirectly from trillions of dollars of taxpayer support for the financial system – to consider their duty by recognizing that the status quo is not acceptable.

Financial reform is a complicated subject. We welcome input from anybody who can help us get it right. But we are not interested in compromising with those who see these issues through the prism of their continued ability to operate within the profitable, but unacceptable, paradigms of the past.

President Obama came to Washington committed to change the way business in government is done. What we are able to do with financial reform now, in the wake of the financial crisis, is an important embodiment of that commitment. In order to usher in a "new era of responsibility" we must ensure that we do not go back to the kinds of abuse that helped cause this crisis in the first place.

Lawrence H. Summers is Director of the National Economic Council and Assistant to the President for Economic Policy